THE EMERGENCE OF A NEW SEIGNORAGE

Spreading the Seignorage Rights between Chartered Financial Institutions Accepted to Trade Instruments and the Central Banks' Right to Drive Values

In Chapter 3 (21st-Century Money Analysis), we discussed three monetary functions[1] – one of which was the role of money as a reserve. We looked at the seignorage privilege and at one new aspect of it – the privilege of issuing currency when that currency is accepted outside its macroeconomic borders, called the “exorbitant privilege”. We see that structures and fame have a strong resilience in the face of facts. This explains the return and mystic drive to gold, which is easy to understand as a single currency denominator and which is also reminiscent of a prosperous period when gold was available in large quantities, usually corresponding to military victories for the holding nation and to territorial expansion. The bargaining power of citizens during these periods of prosperity was on an upward slope. However, change for whatever reason – rise, decline or transformation of civilizations – are inevitable, and the economy and money must adapt. No privilege can survive for ever, and the disappearance of gold coinage is here to stay, just as the passage through security screening for air travellers is. No nation has sufficient military superiority to support monetary trust. On the contrary, an army is a cost, and the payback that a country may expect today will not compensate such a cost in a world where assets are mostly immaterial and there is less value in seizing raw materials. On the contrary also, armies are to protect societies with their philosophies and way of life and all of the goodwill that goes with them. It is a cost of similar nature to the justice department's cost. As a result, money can only be grounded on flows of funds resulting from exchanges. It is a multiform participatory system where no privilege can remain in just one hand. That being said, the problem of the money standard arises again.

Because modem money is simply postings on ledgers, the nature of seignorage has changed. When you are the holder of a book balance with a nominal value on a ledger – even if you have paid more or less of this nominal value for it – accounting-wise it can either stay as it is or be exchangeable into bank bills before its due date (if exchangeable and if it has a due date), or be converted into another instrument, if not into goods or services. If such an event happens at the due date of the financial instrument, the balance (client's or vendor's account on the books) is cleared and the corresponding payment money shows on a bank account or as a substituted instrument reducing another balance. From that process we understand that money creation will result from activity creating receivables and corresponding payables.

If the money floating around in each of the exchangeable categories of money is too significant compared with its conversion possibilities, this trapped money will go directly or through contagion processes to the safest places, to benefit from the expected best contracts in terms of guarantees and return. The production of new financial instruments compared with their final volume will determine a growth or retrenchment from M5 and M6, both as a result of variation in activity volume and prices. When analysing national or transnational (see MGI report in the References) integrated accounts, we see a slow contraction balanced by new governmental issuances, a sign of the slow economic trend in western economies. The new seignorage not only stands as the capability of central banks to issue money, but also at the economic agent level to carry on and expand business, or not. The seignorage monopoly has disappeared and is now spread within a circle of companies being able to impose prices. It is rewarded with fees and commissions due to the resulting oligopolies that the remaining bank monopolies and the limited rights to be accepted to a counterpart on markets bring to the management of financial institutions, marketplaces, shadow banking and any financial player strong enough to be accepted as such. Changing the allocation of GDP among societies, they share the seignorage power of governments and their respective central banks. It is never a stable pattern because of technical and market competition. The new pattern is reversible and may include and add to the creation as well as the destruction of money, with changes in prices and valuations of instruments inside the balance sheets. The destruction, and this is key, happens at private household and corporate level, where intercompany credit and receivables from households are two-thirds of the global economy financing.

Centralized monetary policies through the banking system and interest rates are consequently going to have limited impact on monetary volumes. The old seignorage concept of forced value of coins and bills has disappeared with the benefit of the right to impose market conditions when exchanging and being paid. It is included in the exchange prices, meaning the receivables. The sovereign's monopoly to issue money in their nation has disappeared in favour of several new powers that are transnational, raising new concerns as for taxation. Remains or guaranteed issuances by governments and agencies keeping prices up (like for real estate by buying MBSs) are still there for longer-term payments that private sector and financial markets cannot sustain. The capability to levy taxes, regulate instruments and markets to change exchangeability of instruments, as well as to drive a monetary policy that will change the original values of instruments through interest rate policies, are still in the hands of the sovereign and the remaining seignorage rights are shared amongst those in the financial world.

  • [1] Reminder: payment instrument, measurement instrument and reserve.
 
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